E-COMMERCE: Alibaba Salivates at Ele.me in ‘New Retail’ Vision

Bottom line: Alibaba's potential purchase
of Ele.me could be the biggest piece yet in its pursuit of a "new
retail" model, but could result in a case of indigestion as it
tries to make the company profitable.

When it comes to acquisitions,
e-commerce giant Alibaba (NYSE: BABA) seems to have an insatiable
appetite these days. After investing some 80 billion yuan ($12.7
billion) in brick-and-mortar retailing over the last couple of
years, the company is now setting its eyes on take-out dining
specialist Ele.me, in a deal that could cost it around another
$5 billion.

This particular buying binge does seem a bit more focused than
Alibaba's previous M&A patterns, which always felt a bit more
random to me and covered a wide range of areas. In this instance,
the company is pursuing founder Jack Ma's vision of a "new retail"
landscape that will combine Alibaba's mastery of e-commerce with
more traditional brick-and-mortar retailing.

In fact, this flavor of the day isn't really all that new, and
was previously the hot topic when it was known as online-to-offline
(O2O) business. But Ma seems to be taking the concept to new
heights with his current buying frenzy.

According to the latest headlines, Alibaba is in discussions to
buy out the shares in Ele.me it doesn't already own from a series
of existing stakeholders. (English
article) One report says Alibaba currently owns about a quarter
of the Shanghai-based company, which it acquired in various stages
over the last few years, including by helping to finance Ele.me's
buyout of a rival service operated by leading search engine
Baidu
(Nasdaq: BIDU) last year.

Ele.me valuations seem to vary, but the figures I've seen range
anywhere from about $6 billion to as much as $9 billion following
the Baidu acquisition last year. If those numbers are accurate,
that would mean Alibaba would have to pay as much as $5-$6 billion
for the remaining stake in Ele.me, significantly raising its
M&A spending binge on these third-party retailers to nearly $20
billion.

There's not much more detail in any of the reports, though I did
hear one rumor that Alibaba launched the bid as a result of some
conditions included in the original purchase of the Baidu takeout
service by Ele.me last year. That deal saw the cut-throat industry
whittled down to two, namely the new-and-improved Ele.me and a
rival service operated by group buying and restaurant ratings
specialist Meituan-Dianping.

Jack Ma's New Passion

Whatever the motivation, it's clear that Ma has found a new
passion in this pursuit of his "new retail" dream combining
traditional retailing with e-commerce and other high-tech elements.
In addition to his purchases of supermarkets, department stores and
even a big stake in a home improvement chain, Ma has also launched
his own high-tech supermarket concept called Hema, and is rolling
out a high-tech unmanned convenience store as well. (English
article)

I personally like this strategy a bit more than his previous one
of moving into a wide range of unrelated areas outside Alibaba's
core e-commerce business, many of them in the entertainment space.
This particular approach looks a bit more akin to global rival
Amazon (Nasdaq: AMZN), which has also delved into
the unmanned convenience store concept and made its own big play
into traditional retailing with its purchase of high-end
supermarket operator Fresh Fields last year.

As to this particular purchase of Ele.me, I should also add that
I have a few doubts about the company's longer-term viability.
Ele.me basically uses a very high-cost and not very scalable
business model due to the legions of deliverymen it employees to
deliver cooked meals to people's homes. Adding to the pressure,
many of the mom-and-pop restaurants that provide food on the
platform already operate on razor-thin margins, and can hardly
afford to give away more of their profits to a third-party operator
like Ele.me.

One of the reports is saying that Ele.me will help to complement
Alibaba's "last-mile" delivery network for bringing goods from
stores and big warehouses to people's homes. But frankly speaking,
this network already exists in the dozen or so major parcel
delivery companies whose vehicles already clog China's streets.
Accordingly, I'm not incredibly bullish on the need for or wisdom
of this particular acquisition, which could ultimately leave
Alibaba with heartburn as it tries to make Ele.me profitable.